DOES THE UK vote to leave the EU jeopardise London as a financial centre? That’s the question that’s been on everyone’s lips for months. We might not have had a direct answer to that question immediately, with Morgan Stanley denying a BBC report on Friday that the firm had already begun moving 2,000 London-based investment banking staff.
But I can’t see how London can survive Brexit as the pre-eminent international financial centre even if people are reluctant to write it off at this stage. The net result will be more power to New York and a fragmented horses-for-courses outcome in Europe.
As well as Morgan Stanley; JP Morgan, HSBC, Goldman Sachs and other banks had talked publicly in the run-up to the referendum about moving staff in the event of an exit vote. They were holding fire on making concrete comments into Friday afternoon but all banks have drawn up contingency plans so you’d imagine it’s just a matter of time before they start the exodus.
Giving rise to the speculation around Morgan Stanley, Colm Kelleher had said in a Bloomberg TV interview on Wednesday that while he didn’t believe London would cede its leadership in global financial services per se, Brexit would lead to a diminution in the number of people employed in financial services in London. He said Morgan Stanley would be looking to establish a European HQ and cited Dublin or Frankfurt as options.
Euro clearing is an obvious casualty to London as it naturally shifts to Continental Europe. But the future of the UK as a gateway to the EU – including as a financial services passporting location – is by definition finished so will result in a lot more businesses transferring, including euro bond and derivatives trading. Paris and Frankfurt will be obvious net beneficiaries. Why in the circumstances wouldn’t Deutsche Bank, BNP Paribas or Societe Generale just shift back to their home countries?
And what about the US banks? If the gateway function is killed stone dead, what’s to stop the US investment banks operating out of New York with Continental European headquarters and a satellite UK operation being kept purely for UK client businesses? And on the basis that a lot of investment bankers have UK and Ireland coverage or product responsibilities, Dublin would be a fabulous location.
Scope Ratings’ Sam Theodore put out a piece on Friday saying Brexit won’t be good for European banks’ wholesale and investment banking operations, whether they’re based in the UK or not. It’s hard not to agree.
“We see Brexit as a strong catalyst for further scaling down of investment banking operations,” he wrote, “first and foremost in secondary markets. It has been our belief that, within the realm of the investment banking label, primary market activities … have been poised to grow, being as essential for the real economy as bank lending.
“It is in the secondary markets, however, with the excessive trading volumes and positions and the unnecessarily inflated balance sheets and market risks, that the scaling back has been taking place. It is the secondary market activities which we believe will be severely affected by the Brexit decision aftermath. One consequence of that is that secondary market-related capacity in the City of London may be further reduced.”
BREXIT IS NOT the only issue London faces even if it adds monumental pressure to an already-fragile status quo. Most major European banks’ investment banking operations are London-based but the serial reorganisations, headcount reductions, business model shifts and ROE-optimisation plans at play within pretty much all of Europe’s universal banks over the past years as a response to market and economic conditions and the heavy regulatory pendulum had already curtailed their ambitions.
If anything was likely to strain London’s role as a pre-eminent centre for cross-border financial and capital markets even in the event of a remain vote, it was the heavy and misguided hand of over-regulation that’s been in play since the end of the global financial crisis and the banks’ reactions to it, plus continued poor underlying economic conditions that curtail clients’ willingness to transact.
Brexit adds massive downward pressure on the City’s prospects. The regulatory clampdown in the UK is not just an EU phenomenon. It’s a local response to a global call-to-arms initiated by the G20 through the Financial Stability Board and crammed down via domestic regulatory and supervisory agencies into domestic interpretations.
Until the UK exit, London will clearly be subject to EU regulation, but the Fair and Effective Markets Review, the senior managers regime, the certification regime and conduct rules are home grown and have been greeted as major disincentives to conduct business in the UK.
In trying to avoid a future systemic crisis by solving for the last one, regulation had already stifled innovation; undermined the economics of investment banking; and undermined the notion of an international level playing field. And in strait-jacketing the banks’ ability to operate, it’s also undermining their preparedness to lend.
As a final comment and as a hardcore fan of capital markets as a capital transfer channel, the European Commission’s Capital Markets Union project is a worthy one that offers the corporates currently starved of funding a menu of potential options, particularly SMEs, across loan markets, asset-based finance and securitisation, private placements, bond markets, direct and online lending. That may be a detail in the grand scheme of things but having the UK outside of that tent is a huge retrograde step.
The London exodus begins now. Watch it unfold.
